• US inflation is at a record high and could result in faster and steeper interest rate rises
• This might be good for the profits of banks and insurance companies
• A financial services ETF can be used to invest in a large number of these firms by holding a single share

As US inflation reaches its highest level in 40 years, some market analysts think that the US Federal Reserve might have to raise interest rates sooner and more aggressively than first thought. Against this backdrop, this fund, focussed on US banks and insurance companies, is one of my best exchange-traded fund (ETF) picks right now.

How financial institutions can benefit

These firms in the finance sector are usually sitting on lots of cash from depositors and from their other business activities. They earn money from taking these funds and either lending them out or investing them.

When interest rates rise, they can benefit in two ways.

First, banks can charge more on loans and mortgages, but don’t usually pay savers much more interest. This means their profits should rise as they collect more money from borrowers than they have to pay depositors. Additionally, higher interest rates tend to reflect a period of greater economic growth. A stronger economy might mean that more consumers seek loans.

Second, financial companies can make more money from investments, such as short-term government debt. US banks tend to invest in Treasury bills (short-term US government debt) and these will now pay more.

A best ETF pick

The ETF I’m looking at is iShares S&P 500 Financials Sector (LSE:UIFS). This fund aims to track the performance of the S&P 500 Capped 35/20 Financials Index. At present this contains 67 holdings, representing the largest US financial services firms.

The largest holding at just under 13% is Berkshire Hathaway. Warren Buffett’s company holds large cash reserves, has sizeable holdings in other banks, and most importantly has a huge insurance business generating massive inflows of money in the form of customer premiums. The second and third largest holdings are JP Morgan Chase and Bank of America, at around 10% and 8% respectively. Both of these are multinational investment banks and financial services companies. 

Over the last 12 months, this fund has performed strongly, increasing over 30%. However, year-to-date performance has been subdued. Because of the general pullback in the financial markets this year, at the time of writing, this ETF is pretty much flat.

This serves as a note of caution for me. Though increasing US interest rates could be bullish for these companies, this fund is not immune to the normal up and downs of the stock market. After all, in investing, nothing is guaranteed.

However, historically periods of increasing interest rates have generally been positive for financial services and that’s why iShares S&P 500 Financials Sector is one of my best ETF picks right now. For this reason, I’m seriously considering adding this fund to my holdings as part of a balanced portfolio.

The post Here’s 1 of my best ETF picks right now! appeared first on The Motley Fool UK.

• Banks and insurance companies generally have large cash holdings
• When interest rates rise this can be good for their profits
• A financial services ETF can be used to invest in a large number of these firms by holding a single share

It’s widely believed that there are going to be at least three US interest rate rises this year. This has caused global stock markets to plummet in recent days. As the Federal Reserve meets this week to give further guidance on increases to the cost of borrowing in the US market, I’m now looking at this financial services exchange traded fund (ETF).

How banks can benefit

Increasing interest rates are generally thought of as negative for the stock market. However, one exception is the financial services sector.

Banks are usually sitting on piles of cash from depositors and from their other business activities. They earn money from taking these funds and either lending them out or investing them.

When interest rates rise, financial institutions can benefit in two ways.

First, banks can charge more on loans and mortgages, but don’t usually pay savers much more interest. This means their profits should rise as they collect more money from borrowers than they have to pay depositors. Additionally, higher interest rates tend to reflect a period of greater economic growth. A stronger economy might mean that more consumers seek loans.

Second, they can make more money from investments, such as short-term government debt. US banks tend to invest in Treasury bills (short terms US Government debt) and these will now pay more.

The ETF I’m looking at

An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers. It allows me to invest in a large number of companies by holding one stock.

The ETF I’m considering is iShares S&P 500 Financials Sector (LSE:UIFS). This fund aims to track the performance of the S&P 500 Capped 35/20 Financials Index. At present this contains 67 holdings, which represents the largest US financial services firms in the US.

The largest holding at just under 12% is Berkshire Hathaway. Warren Buffett’s company holds large cash reserves, has sizeable holdings in other banks and most importantly has a huge insurance business generating massive inflows of money in the form of customer premiums.

Performance and opinion

Over the last 12 months, this fund has performed strongly, increasing over 30%. Admittedly, year-to-date performance has not been great. Despite a good start to the year, at the time of writing, this ETF is down around 4%.

This serves as a note of caution for me. Though increasing US interest rates could be bullish for these companies, this fund is not immune to pullbacks in the general market. After all, in investing, nothing is guaranteed.

However, I feel the fall in the price over the last few days is a short-term blip. Historically periods of increasing interest rates have generally been positive for financial services. Once investors realise that 2022 might be positive for this ETF, I hope it will rise strongly. For this reason, I am seriously considering adding iShares S&P 500 Financials Sector to my own portfolio.

The post Why I think rising US interest rates could be bullish for this ETF appeared first on The Motley Fool UK.